3 Risks Involved with Purchasing a Rental Property

Becoming a landlord is looking more and more attractive with rental property functioning as a long-term, stable source of income. Nearly 4 million families have become renters in the past year, with rent prices rising rapidly.

However, there are several obstacles that explain why not everyone rushes to fix up and rent out properties in distressed markets. Here are some important risks to consider before starting a portfolio of rental property:

1. Rental property requires initial investment and doesn’t guarantee a quick return

• In addition to a down payment, monthly payment, mortgage interest and other purchase fees, considerable time and energy may be required to get your investment off the ground
• Consider the total purchase price, maintenance costs, management fees, HOA fees, property taxes, as well as the monthly rental cash-flow, and always Calculate the ROI (Return on Investment) before signing any checks
• Your rental property could quickly turn into a negative cash-flow “money pit” if payments and expenses exceed the monthly rent

2. Maintenance may be required before the property is considered “rent ready”

• Depending on the property age and location, your new single or multifamily home may not be in turnkey condition at the time of purchase
• In distressed markets, such as Detroit, Cleveland & Chicago, where the unemployment rates are high and the incomes are lower, vacant properties may be stripped of appliances, copper pipes and plumbing.
• Unless a property is completely turnkey at the time of purchase, necessary maintenance may range from light cleaning and dusting to heavy rehab
• Even after you have secured tenants, regular maintenance must also be factored into the monthly overhead costs

3. Employing a reliable property management company is essential to ROI

• Will you have time for advertising and showing the property, screening tenants, collecting monthly rent payments, making simple repairs and, in general, keeping an eye on your investment?
• Especially if you are purchasing a rental home out-of-state, employing a reliable property manager will give you peace of mind and reduce stress
• Property managers offer a wide array of services and typically only charge 10-15% of the monthly rent

Why You Should Invest in Distressed Market Rental Property

In today’s real estate market, investing in residential rental properties has become extremely attractive.

·       In 2012, 36% of renters preferred single family homes as opposed to apartments, up 5% since 2006 (The Kiplinger Letter).

Top reasons to invest in rental property:
 
Passive income with positive monthly cash-flow

Current widespread increase in rental demand

·         Inventory is down due to a decline in residential building activity

·         Creditworthy homebuyers can’t secure financing for mortgages due to stricter underwriting and increased regulation

Having a sense of financial security

·         Sell off your cash-flowing fully rented property to an eager investor if you are ever in need of quick cash

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Rental Property in Distressed Markets, Cash-Flow & Monthly Mortgages:

Source	Location	Price	Rental Income	Mortgage Payment*
Sold on Bid4Assets	Cleveland, OH	$19,900	$700/month	$110/month
Sold on Bid4Assets	Fort Myers, FL	$48,250	$700/month	$267/month
Listed with Agent	Los Angeles, CA area	$320,000	$1,775/month	$1,770/month

*Based on 30 yr mortgage, 100% loan amount, 3.5% interest, 1.25% property tax, and .5% PMI

In highly distressed markets like Cleveland, Detroit, and Buffalo, you can buy a house for around $20,000 that will rent for $700/month. Financing will be difficult on a property like this, but if you were able to get a 30-year mortgage, the payment would be in the ballpark of $110/month. You can buy a home in mid-range market like Fort Myers for around $50,000, which may rent in the ballpark of $700-$800.  A mortgage payment on a house like this might be around $267/month.  In the more expensive Los Angeles market, an agent has a cash flowing duplex listed at $320,000, which generates $1,775. 

While the rental income is 2.5X that of the more distressed markets, the price is six to fifteen times higher.  In other words, you could buy around FIFTEEN cash flowing houses in highly distressed markets like Cleveland for the same price as a cash flowing duplex in parts of Los Angeles!!!

In summary, distressed markets have a massive gap between rental income and mortgage payments, while in stable, higher-priced markets rental rates tend to be close to mortgage payments.